Moreover, metal in Chinese bonded warehouses is trading
at a premium of about $50 to the LME, according to traders. While that
is down from as much as $150 a few months ago, it is still surprisingly
high given the soft demand in China.

The reason, traders say, is that much of the copper in bonded warehouses is locked up in “financing deals”, in which companies import copper in order to use it as collateral for bank loans. With financing for such trades relatively plentiful, traders say that only a fraction of the metal in bonded warehouses is available for sale.

Now, if the same logic is applied to the oil market, this could
suggest that inventory figures are not at all what they seem. Indeed a
breakdown of what inventory is “available for sale” and what proportion
is “unavailable for sale” might be required in order to even begin to
understand what’s really going on.

Though, how anyone can tell which commodity stock has been ‘encumbered’ via a financing deal and which hasn’t, we don’t know.

The point is that the market may be under appreciating the influence
of commodity encumbrance. It is, after all, giving rise to a situation
whereby inventory is being withheld from willing buyers, creating
something akin to an artificial squeeze.

There are important implications of these developments.

For one thing, consider what European bond markets have taught us
already (yes, really). When the ECB stepped in as financier
extraordinaire of what were previously illiquid and unwanted peripheral
bonds, it encumbered so much supply for so long that it easily managed to push spot bond prices towards recovery (albeit temporarily in most cases)....MORE

You can draw an analogy to U.S. labor markets.
The day-labor roofer in the Home Depot parking lot was never included in the official numbers during the boom so when the crash came and they were laid off the Dept. of Labor reported job losses that were on the order of one million less than actually occured in the real world.
A human shock absorber.